Provincial trade shackles rust in irrelevance

OTTAWA â€” Prime Minister Stephen Harper wants to reduce trade barriers within Canada, a reasonable objective through the first century of Confederation – when we were still trying for a sea-to-sea nation. And, though never absolutely necessary for our survival, free trade within the country would indeed have been a nice touch, evidence of a certain minimal commercial civility throughout the country. The provincial barriers, alas, remain – as does the provinces’ constitutional right to keep them forever. But now, really, who cares?

The markets that matter now are the North American market, the Asian market, the European market, the South American market. In a sense, the Canadian market – or, more precisely, the 10 provincial markets – matter less than they have ever mattered, diminishing in importance by almost one-half in the past quarter century alone. (In 1981, interprovincial trade accounted for 35 per cent of Canadian gross domestic product, international trade for 20 per cent. By 2006, interprovincial trade accounted for less than 20 per cent of GDP, international trade for 45 per cent.) In this context, provincial trade restrictions, though anachronistic, are only marginally relevant.

Further, as Alberta and British Columbia demonstrated last year with their own bilateral free-trade agreement, Canada’s domestic trade barriers will probably fall aside sooner or later, in their own sweet time, of their own accord. Mr. Harper risks wasting time in trying to quicken the process – or, more probably, risks wasting money. His federal push, (on offence) will simply induce equivalent provincial push-back (on defence); and the only way for the federal government to prevail will be with large amounts of federal money euphemistically designated as compensation.

Oddly enough, though, Canada has never actually needed internal, domestic free trade. If we had needed it then, we would now have it. In a fundamental sense, it isn’t governments that decide these things anyway. Businesses determine trade routes; governments build the roads and the bridges that these trade routes require. Naturally, as bureaucratic entities, governments have a hard job keeping up to the needs of commerce.

This principle is inherent in the nature of governments, which restrict people’s freedoms when possible and expand them when necessary. It is this principle that explains the paradox of a country that has had limited trade with itself for almost a century and a half – even as it has continuously expanded trade with foreign countries. Because interprovincial trade was not essential, Canada limited it; because foreign trade was essential, Canada allowed it.

We got NAFTA, after all, only when businesses had finished the heavy lifting, demonstrating the unequivocal necessity of North American free trade. In a de facto way, the economic integration of Canada and the U.S. had been largely accomplished by the time Prime Minister Brian Mulroney and U.S. President Ronald Reagan delivered the historically elusive Free Trade Agreement (FTA) almost precisely 20 years ago: Jan. 2, 1988.

The Mulroney-Reagan FTA liberalized trade rules and established formal procedures to handle trade disputes. By and large, it was not a tariff-cutting agreement, which most international “free trade” deals are. More than 35 per cent of Canada-U.S. trade was already tariff-free before the FTA (including Canadian exports of oil) and the tariffs that remained were (on average) very low. Although Canada-U.S. trade has more than tripled in subsequent years, the biggest growth in cross-border trade occurred before the FTA.

Statistically, the biggest increase in the share of Canada’s exports that went to the U.S. occurred in the first five years after the Second World War – especially during the remarkably laissez-faire government of Liberal Prime Minister Louis St. Laurent.

In 1946, the U.S. bought 40 per cent of Canada’s exports; by 1951, the U.S. bought 65 per cent – an increase of more than 60 per cent.

Liberal Prime Minister Lester Pearson’s auto pact with U.S. President Lyndon Johnson in 1965, a neat piece of economic infrastructure, boosted the U.S.-bound share to more than 70 per cent.

By 1986, two years before the FTA, 75 per cent of Canada’s exports went to the U.S.

This upward dynamic reached its peak in 2001, with 85 per cent of Canadian exports going to the U.S. (The percentage has since slipped back, reflecting increased exports to the rest of the world, to 75 per cent in 2007.) Mr. Harper should forget the merely desirable fixes and concentrate on the essential fixes – streamlined border crossings that guarantee no-wait times, off-border Customs clearance facilities (such as Mexico’s first foreign Customs-clearance facility, which will be built in Kansas City), continental co-ordination on building the superhighway infrastructure of the next century. Most of all, he should concentrate on the common North American security perimeter that alone will ensure maximum Canadian prosperity through the 21st century.